- Financial planning
- 6 minute read
When selling or disposing of an asset for a profit, the process isn’t quite as straight forward as selling your clothes and electricals on an online marketplace, since certain legalities will be encountered. Capital Gains Tax (CGT) applies to all transactions of this sort and applies to a range of assets, including shares, property, jewellery, investment funds, and paintings, to name but a few.
It’s worth noting that Capital Gains Tax only applies if you exceed your tax-free allowance, which amounts to £12,300 per year. Each UK citizen is entitled to an annual CGT allowance and this cap isn’t subject to change until April 2026.
The rate applied to your personal CGT will also be determined by your household income, and if you’re a higher or additional-rate taxpayer, you will be subject to an increased CGT rate of 28% on profits made on residential property and 20% on profits made on any other chargeable assets.
Some assets aren’t subject to CGT, including:
- Shares and funds held in an ISA or pension,
- Your main residence, so long as you don’t rent it out or utilise it for business purposes,
- Assets donated to charity,
- Personal belongings with a value of £6,000 or less.
Although CGT is unavoidable, there are ways that it can be reduced, so to help you to save your capital, here are ten methods to reduce your CGT bill.
1. CGT allowance
As we previously mentioned, everyone in the UK has a Capital Gains Tax allowance, which renews on an annual basis. If you manage to keep the gains that you make from your assets below this cap, then CGT will not apply. Unfortunately, you can’t carry your allowance over to the following year, so any amount that you do not use will be refreshed at the beginning of the following year. Because of this, it’s worthwhile to attempt to use some of your allowance each year, as this will minimise the risk of developing an unwelcome CGT bill in the future.
2. Transfer assets
A straightforward method which will enable you to increase your CGT tax allowance, and avoid incurring unwanted costs to annual gains, is to transfer your assets to your spouse or civil partner. If no conditions apply to the transaction, then this transfer will not be subject to CGT, and could see your annual allowance amount to £24,600, making it an effective way to protect the profits that you make on your assets.
3. Spread gains
Spreading gains is the process of splitting the sale of your asset over multiple years, to take advantage of more than one annual CGT allowance. This likely won’t work in the case of most of your physical assets, since they aren’t divisible, but you could spread the sale of your investments over multiple tax years, to avoid incurring CGT costs. By planning your sale and spreading it across two or more years of CGT allowances, you could maximise the annual allowance that you’re entitled to.
4. Deduct costs and offset losses
When calculating your CGT liability, it’s important that you deduct any costs attached to your assets first, as this will affect the tax that you incur. This could include the stamp duty that you paid on your property, for example, which would significantly impact the amount of CGT that you’re entitled to pay.
Additionally, you will also want to offset the losses against the profits that you have made on your assets in that same tax year. This can be an effective strategy to reduce your CGT liability. This is because if your losses exceed your gains, you have the ability to carry these over and offset them against future gains, making your CGT allowance go further. It is only possible to implement this technique if you have registered the sales of your assets with HMRC.
5. Manage your income levels
Your income tax rate can also impact the amount of Capital Gains Tax that you are liable to pay. However it is possible to reduce your income tax rate. The majority of workers in the UK are entitled to pay income tax, since it applies to all annual incomes that exceed £12,570. You can reduce your taxable income by making donations to charity, or taking steps towards planning for your retirement, by making pre-tax deposits into your pension.
6. Invest — an ISA or pension
Perhaps the simplest way to avoid Capital Gains Tax charges is to change the way that you invest your capital. You could invest within a stocks and shares ISA - a tax-efficient individual savings account. You will be able to invest in a range of financial assets, such as shares, bonds, funds, and investment trusts, and any profits that you make will be tax-free. At present, every adult in the UK is afforded an annual ISA allowance of £20,000, making this a great investment option to make your capital go further.
You could also invest in your future by placing your capital into a pension account, since all deposits made into this fund are exempt from tax. You could open a Self-Invested Personal Pension, allowing you to save and invest without being affected by CGT.
7. Consider investments
Investments in property can be lucrative, especially if you’re able to build yourself a solid portfolio, however, if you own additional property to your main residence, it will be subject to Capital Gains Tax. Depending on the tax band of the property, this could be between 18% and 28%, which is a large deduction from your total gains. Alternatively, if you’re looking to invest, you might want to consider diversifying your investment portfolio and placing your capital in more tax-efficient assets like stocks and bonds for example, which are taxed at either 10% or 20%.
8. Invest in early-stage growth companies
If you’re an experienced investor, and are comfortable with taking risks and implementing risk management strategies to protect your capital, you might want to consider investing in early-stage growth companies. You can find said companies by delving into venture capital schemes. These are programmes set up by the government to encourage investors to place their capital in companies in their early stages of development. This will enable you to purchase a larger portion of a company without having to stake so much of your own capital.
One example of a government-funded scheme of this type is an Enterprise Investment Scheme (EIS). Capital Gains Tax does not apply to any profits made on investments within this scheme, if the investment is held for a minimum of three years. This strategy is best suited to experienced investors because of the high-risk involved, so make sure to consider this and discuss with a financial adviser before investing.
9. Business assets relief
If you’re a business owner and choose to sell your assets for less than their value to help the buyer, or simply give them away, you could be entitled to Gift Hold-Over Relief. Disposing or selling your assets in this way will mean that you’re exempt from Capital Gains Tax. In fact, the person who you then transfer them to, will be liable to pay CGT when they eventually decide to part with them.
A similar form of relief that can minimise your CGT liability is Business Asset Disposal Relief. This is another great option for business owners wanting to get rid of certain assets. With this option, you will only be required to pay tax at a rate of 10% on all profits made on qualifying assets. The lifetime limit for this scheme is £1 million.
10. Gift assets into a trust
You might want to consider placing your assets into a trust, if you’re wanting to avoid an immediate Capital Gains Tax charge. With this approach, the trust itself will take the responsibility of the cost of the asset and is therefore liable to pay the CGT that applies when it is eventually sold. It is worth undertaking extensive research if you choose to go down this route, as the rules involved are complicated. However, it could prove beneficial to work with a financial adviser, who can oversee the process.
When selling your assets, your main priority is likely to be making a profit and getting the most from your capital. As such, you don’t want to be hindered by hefty CGT charges, which will deduct from your overall gains. Therefore, it’s worth planning ahead and implementing strategies that can minimise tax charges. These plans could be supplemented by seeking support from a financial adviser, who can help you make the right decisions for your circumstances.
To find out more or if you have any questions about financial advice, contact us to find out how we can help.
Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up, and you may get back less than you invested.